BC 'n D just paid its annual dividend of $.60 a share. The projected dividends for the next ﬁve years are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time, the dividends will be held
Constant at $1.40. What is this stock worth today at a 6% discount rate?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is $20.48. The present value of the dividends is calculated by dividing the dividend by the discount rate. The dividend for the first year is $.60, so the present value of the dividend for the first year is $.60 / 0.06 = $10.00. The dividend for the second year is $.30, so the present value of the dividend for the second year is $.30 / 0.06 = $5.00. The dividend for the third year is $.50, so the present value of the dividend for the third year is $.50 / 0.06 = $8.33. The dividend for the fourth year is $.75, so the present value of the dividend for the fourth year is $.75 / 0.06 = $12.50. The dividend for the fifth year is $1.00, so the present value of the dividend for the fifth year is $1.00 / 0.06 = $16.67. The dividend for the sixth year and beyond is $1.40, so the present value of the dividend for the sixth year and beyond is $1.40 / 0.06 = $23.33. The present value of the dividends is the sum of the present values of the dividends for each year, which is $10.00 + $5.00 + $8.33 + $12.50 + $16.67 + $23.33 = $20.48.

BC 'N D Just Paid Its Annual Dividend of